These 4 Measures Indicate That SeSa (BIT:SES) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that SeSa S.p.A. (BIT:SES) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that SES is potentially overvalued!

What Is SeSa's Debt?

The image below, which you can click on for greater detail, shows that at July 2022 SeSa had debt of €353.9m, up from €285.9m in one year. However, it does have €466.9m in cash offsetting this, leading to net cash of €113.0m.

How Strong Is SeSa's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SeSa had liabilities of €920.9m due within 12 months and liabilities of €399.4m due beyond that. On the other hand, it had cash of €466.9m and €620.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €232.8m.

Given SeSa has a market capitalization of €1.69b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, SeSa also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, SeSa grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if SeSa can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. SeSa may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, SeSa actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although SeSa's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €113.0m. And it impressed us with free cash flow of €94m, being 118% of its EBIT. So we don't think SeSa's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of SeSa's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.